The pandemic affected economies around the world, with China being the only major economy registering positive growth in 2020. The policy support of the governments, vaccinations, a better understanding of the virus and how to deal with it, have all brought growth back.
However, the post pandemic world of today is not the same as before. As recovery takes root and economies plan to get back to pre-COVID growth trajectories, there are seven key issues that policy making across nations, needs to address for sustained recovery.
One, though growth is back, the recovery is a two-speed recovery with widespread differences, both inter-country and intra country. The developed world with much higher fiscal support and access to vaccines has recovered much faster than developing and low-income countries. Within countries the contact-based sectors have been slower to pick up. The more vulnerable sections of society bore greater brunt of loss of jobs and livelihoods.
The economic realities of a two-speed recovery have exacerbated inequalities making them stark and intensive as never before. To address this, inclusion will have to be a key component of all policy making going forward.
Two, COVID is not over yet. The concerns caused by the recent mutation, the Omicron, show how fragile the recovery is. Also, COVID is not the last pandemic that the world will have to deal with.
Given the severity of the health & economic crisis and the scale of loss of lives that pandemics can cause, countries should institutionalize pandemic preparedness, in terms of surveillance, local level capacity to respond to outbreaks and nip them in the bud, therapeutics, vaccinations, health infrastructure both physical and trained manpower and public private partnerships.
In addition, nations need to come together and build institutional mechanisms for global cooperation on pandemic preparedness.
Three, led by the United States, governments and central banks across the world have been literally printing money leading to a surfeit of liquidity. However, this cannot continue forever, and the hope is that the withdrawal of this policy would be gradual. The process will place the dynamics of inflation, monetary policy, fiscal deficits and interest rates center stage in the global economic thinking, and countries should start preparing for this beginning calendar year 2022.
Four, the challenge of climate change requires urgent and substantive actions by all. The Earth’s carbon-di-oxide levels are the highest in the last 3 million years, when the temperatures were 3 degrees higher and sea levels 10-20 meters. Therefore, it is crucial to bring down the emissions substantially within this decade itself to be able to achieve the goal of limiting temperature increases to 1.5 degrees.
The task ahead is huge and must translate into significant policy and execution initiatives, which will have both positive and negative economic outcomes.
Five, the pandemic has fast paced technology adoption, which brings with it the issues of disruptions, dislocations, and friction. Policy making needs to address these challenges.
Six, the pandemic has caused unprecedented supply chain shocks leading to global supply shortages. Semiconductor shortages is one such example. These shortages have affected businesses across the globe, due to their dependence on the complex Just in Time (JIT) global supply chains. The supply shortages lead to lower capacity utilization in user industries, inspite of demand being there. This in turn impacts investment and capacity expansion decisions. Economies need to deal with these shortages and also plan for mitigating the impact of any such future global events on supply chains.
Seven, in a two-speed world, economic policy should re-visit the idea of Universal Basic Income (UBI), as a social protection tool and also as a demand stabilizer. While the implementation of this would be easier for the developed world with resources available at its disposal, developing countries like India also need to start deliberating on some form of UBI.
CII expects growth rate at around 9.5% for the current fiscal
In India specifically, the rebound from the second wave has been sharp with growth expectations for this year pegged at 8-10 per cent; CII’s expectations of growth for this year are ~9.5 per cent. Going forward, in addition to the seven issues described above, there are some India specific challenges that policy making needs to address.
Growth is an imperative for India for multiple reasons – for increasing the per capita incomes, generating jobs, for debt sustainability and macro-economic stability. The bold reform initiatives of the government over the last two years, have the potential to place India firmly on a 7 per cent plus growth trajectory over the medium-term.
For this growth to be inclusive and sustained over a long period, there has to be a greater focus on school education and primary & secondary healthcare. Expenditures in these areas need to go up significantly.
India needs more good quality jobs in the formal sector
India should create many more good quality jobs in the organized sector. This is important both from the point of view of equity and sustained growth. Good quality jobs at the bottom of the pyramid feeds demand, which in turn fuels growth.
The jobs challenge needs to be tackled holistically. On one hand specific issues such as the changes that are required in the labour laws need to be addressed. On the other, the broader issues of infrastructure, skilling & education, inclusion & security for female workforce, trade policy etc need to be dealt with. Both manufacturing and services sectors have a key role to play in creating jobs.
India’s share in global trade is low, at only around 1.7 per cent. To increase this, India must follow an open trade policy, leverage opportunities arising out of the current geo-political shifts, and also focus on exports in low skill sectors for job creation. India should also exploit the trade and investment linkage better and given its strengths in the services sector, the trade negotiations should include services in a bigger way.
Government and the private sector needs to join hands for meeting COP26 commitments
The achievement of India’s ambitious commitments at COP26 requires collective effort, at all levels of the Government and the private sector. The issue of climate change is akin to ‘tragedy of commons’ i.e., what is optimal for a firm is not optimal for the economy or society. Only when the clean technologies and energy efficient technologies are seen to be cost saving and privately optimal for individual entities, will they be embraced. Policy making will need to address this.
For the Government to be able to continue to invest heavily in infrastructure, in public goods such as health and education and in the green transition, it needs to augment its resources. India’s tax to GDP ratio has not improved since 2008.
GST and direct tax reforms need to be expedited
Tax experts estimate that India’s tax to GDP ratio may be underperforming by 3-4 per cent and that much of this gap can be met with GST reforms, which can contribute to 2-3 per cent of the GDP. The GST Council should seriously consider the next set of GST reforms including inclusion of goods and services currently left out, rate rationalization to a maximum of three rates, expeditious clearance of GST litigation, and process simplification. In addition, the much-awaited direct tax reforms also need to be taken forward.
This has been contributed by Mr. Uday Kotak, Immediate Past President, CII and Managing Director & CEO Kotak Mahindra Bank Ltd
The article first appeared in CII ARTH. Access the publication here – https://journal.cii.in